Detroit’s Woes Worry Wharton

By Bill Dries

Memphis Mayor A C Wharton Jr. doesn’t think Memphis has the long-term financial problems or the indifference to those problems that prompted city leaders in Detroit to file an unprecedented bankruptcy last week.

But Wharton is still watching what happens in Detroit closely for the impact it could have on Memphis as well as other cities who fund their construction projects through municipal bonds.

“It could have vast ramifications even for strong (governments),” Wharton said last week.

Michigan's state-appointed emergency manager Kevyn Orr, right, and Gov. Rick Snyder, address the media during a news conference in Detroit Friday, July 19. On Thursday, Detroit became the largest city in U.S. history to file for bankruptcy, when Orr asked a federal judge for municipal bankruptcy protection.

(AP Photo/Carlos Osorio)

The Detroit bankruptcy filing is still not a certainty. After the city’s emergency manager filed the case last week, a circuit court judge in Detroit ruled the filing violated the Michigan Constitution. The issue involving pension benefits is back in court there July 29.

But that hasn’t delayed speculation about the precedent the Detroit filing could set for other large American cities with pension fund liabilities in general if not as large as those in Detroit.

Wharton sees cause for concern or at least questions about the place vested retirees and municipal bond holders have in the line of creditors that forms after a bankruptcy is filed. It could affect the decisions made to purchase those bonds and finance local government capital projects.

“The other thing is that there’s always been a presumption that the full faith and credit of the issuing entity … would be behind those outstanding bonds. We will see how the bankruptcy court handles that,” Wharton said. “Heretofore, the court has managed to kind of dance around that and worked out compromises. I think the Detroit situation may be one in which that question is going to have to be answered. … Do the bondholders have some exclusive preference over everybody else and then the question of what about pensioners who are vested?”

The result could be investors who are hesitant to buy municipal bonds.

“Keep in mind when a city issues bonds to build a stadium or a bridge or whatever, it’s private contractors who go to work on it,” Wharton said. “It ripples out into the private sector. … This could have ramifications for our economy in general.”

The possible end of the Federal Reserve’s quantitative easing policy has already caused Wharton to rethink the timing of the restructuring of the city’s debt that the Memphis City Council approved early on in the city’s budget season.

Wharton said earlier this month he will likely delay pulling the trigger on the restructuring to see if the municipal bond market moves up any after going down following remarks from Fed Chairman Ben Bernanke.

The city’s bottom line is the restructuring won’t bring in the $9.6 million the city estimated it would gain from the refunding bonds.